Bon Natural Life's (NASDAQ:BON) Returns Have Hit A Wall

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So, when we ran our eye over Bon Natural Life's (NASDAQ:BON) trend of ROCE, we liked what we saw.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Bon Natural Life, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.19 = US$6.7m ÷ (US$47m - US$11m) (Based on the trailing twelve months to March 2023).

Therefore, Bon Natural Life has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 10% generated by the Chemicals industry.

Check out our latest analysis for Bon Natural Life

In the above chart we have measured Bon Natural Life's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Bon Natural Life.

So How Is Bon Natural Life's ROCE Trending?

While the current returns on capital are decent, they haven't changed much. The company has consistently earned 19% for the last four years, and the capital employed within the business has risen 331% in that time. Since 19% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

On a side note, Bon Natural Life has done well to reduce current liabilities to 24% of total assets over the last four years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Bottom Line

In the end, Bon Natural Life has proven its ability to adequately reinvest capital at good rates of return. However, despite the favorable fundamentals, the stock has fallen 64% over the last year, so there might be an opportunity here for astute investors. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.

On a final note, we found 4 warning signs for Bon Natural Life (3 are a bit concerning) you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.